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Does financial system activity affect tax revenue in Malaysia? Bounds testing and causality approach

Author

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  • Taha, Roshaiza
  • Colombage, Sisira R.N.
  • Maslyuk, Svetlana
  • Nanthakumar, Loganathan

Abstract

We provide new empirical evidence on the relationship among direct tax revenue and banking and non-banking activities in Malaysia's financial system, utilising monthly data for the period 1997–2008. The existence of the long run equilibrium relationship between tax revenue and the financial system was investigated using the autoregressive distributive lag (ARDL) bounds testing approach to cointegration. We find a long-run equilibrium relationship between the financial system and tax revenue in Malaysia. The short-run dynamic relationship between direct tax revenue and financial system was investigated using the vector error correction model (VECM). The estimated ECTt−1 coefficient indicates a relatively fast speed of adjustment from short-run disequilibrium to long-run equilibrium. The Granger causality tests reveal unidirectional causality running from stock market towards direct tax revenue, indicating that an increase in stock market activities is likely to improve the collection of direct tax revenue. Overall, we show that the impact of the financial system on direct tax revenue is more profound in the short run than in the long run.

Suggested Citation

  • Taha, Roshaiza & Colombage, Sisira R.N. & Maslyuk, Svetlana & Nanthakumar, Loganathan, 2013. "Does financial system activity affect tax revenue in Malaysia? Bounds testing and causality approach," Journal of Asian Economics, Elsevier, vol. 24(C), pages 147-157.
    • Handle: RePEc:eee:asieco:v:24:y:2013:i:c:p:147-157
    DOI: 10.1016/j.asieco.2012.11.001
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    Cited by:

    1. Nanthakumar LOGANATHAN & Suraya ISMAIL & Dalia STREIMIKIENE & Asan Ali Golam HASSAN & Edmundas Kazimieras ZAVADSKAS & Abbas MARDANI, 2017. "Tax Reform, Inflation, Financial Development And Economic Growth In Malaysia," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 152-165, December.
    2. Rudra P. Pradhan & Mak B. Arvin & Mahendhiran S. Nair & John H. Hall, 2022. "The dynamics between financial market development, taxation propensity, and economic growth: a study of OECD and non-OECD countries," Quality & Quantity: International Journal of Methodology, Springer, vol. 56(3), pages 1503-1534, June.
    3. Narayan Sethi & Saileja Mohanty & Sanhita Sucharita & Nanthakumar Loganathan, 2020. "Tax Reform And Economic Growth Nexus In India: Evidence From The Cointegration And Rolling-Window Causality," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 65(06), pages 1699-1725, December.
    4. Aguima Aime Bernard Lompo, 2024. "How Does Financial Sector Development Improve Tax Revenue Mobilization for Developing Countries?," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 66(1), pages 91-125, March.
    5. Sèna Kimm Gnangnon, 2022. "Financial development and tax revenue in developing countries: investigating the international trade channel," SN Business & Economics, Springer, vol. 2(1), pages 1-26, January.
    6. Gnangnon, Sèna Kimm, 2019. "Financial Development and Tax Revenue in Developing Countries: Investigating the International Trade and Economic Growth Channels," EconStor Preprints 206628, ZBW - Leibniz Information Centre for Economics.

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    More about this item

    Keywords

    Tax revenue; Banking sector; Bound testing; Causality; Non-banking sector;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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